EastGroup Properties, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. EastGroup is an industrial-property REIT focused on distribution facilities in major U.S. Sunbelt markets. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $51.250 | $46.701 | $148.704 | $139.295 |
| Net income attributable to common stockholders | $8.363 | $6.771 | $23.160 | $20.146 |
| Diluted EPS | $0.28 | $0.23 | $0.77 | $0.71 |
| FFO attributable to common stockholders per diluted share | $0.83 | $0.76 | $2.39 | $2.30 |
| Property net operating income (PNOI) | $36.629 | $33.106 | $106.651 | $99.340 |
- Q3 revenue increased 9.7%; common-stockholder net income increased 23.5%. For the nine months, revenue rose 6.8% and common-stockholder net income rose 15.0%.
- FFO per diluted share increased 9.2% in Q3 and 3.9% for the nine months. FFO is a supplemental REIT measure, not a substitute for GAAP income or liquidity.
- Same-property PNOI increased 2.2% in Q3 and 1.1% for the nine months. Portfolio leased percentage was 96.3% at quarter-end, versus 95.0% a year earlier; occupancy was 95.7%, versus 94.3%.
- Property operating expenses were 28.5% of real estate operating income in Q3 and 28.2% for the nine months, compared with 29.1% and 28.7%, respectively, in 2012.
- Nine-month operating cash flow was $88.579 million, versus $73.183 million. Investing cash outflow was $155.969 million, chiefly reflecting development, acquisitions and improvements; financing provided $66.339 million. Cash ended at $0.207 million.
- At September 30, total debt was $897.498 million, up from $813.926 million at December 31, 2012. This comprised $555.831 million secured debt, $230 million unsecured debt and $111.667 million drawn on unsecured bank facilities. Total assets were $1,465.647 million and total equity $503.684 million.
- Operating cash flow funded part of investment and dividends; the company paid $48.252 million in common-stock dividends during the nine months. Dividends declared were $1.60 per share.
Material changes and business activity
- PNOI rose 10.6% in Q3 and 7.4% for the nine months. Management attributed the nine-month increase to acquisitions ($4.115 million), newly developed properties ($2.234 million) and same-property operations ($1.080 million).
- New and renewal lease rates increased an average 1.6% for the nine months. The company renewed or re-leased 83% of 4.836 million square feet of leases that expired in that period and leased 1.584 million square feet of other vacant space.
- EastGroup acquired two operating properties in Dallas and Charlotte for a total purchase price of $72.397 million, and bought development land for $6.567 million. It began 12 development projects totaling 1.093 million square feet and transferred 12 completed properties totaling 810,000 square feet into operating real estate.
- The development program comprised 14 projects totaling 1.339 million square feet at September 30. Projected total cost was $91.4 million; $40.2 million remained to be invested, and the projects were 55% leased as of October 18.
- There were no operating-property sales in the first nine months of 2013. The comparable 2012 period included $2.036 million of gains from real estate sales, making year-over-year net income comparisons affected by prior-year gains.
- Debt funding changed: secured debt declined by $51.935 million, while unsecured debt increased by $100 million following an August private placement of senior notes at a fixed 3.8% rate. Bank-facility borrowings increased by $35.507 million net.
Outlook, risks and unusual items
- Management stated that operating cash flow and credit lines should fund operations for the next 12 months, and anticipated adequate resources for operating costs, debt service, distributions, capital improvements, acquisitions and development. It also cited access to debt and equity financing. The filing provides no quantified earnings or FFO guidance.
- A $75 million, seven-year unsecured term loan was expected to close in December 2013. Two swaps were arranged to fix its effective interest rates at 3.765% on $60 million and 3.7% on $15 million. The loan closing was prospective at the filing date.
- Subsequent to quarter-end, construction began on Rampart IV, an 84,000-square-foot Denver distribution building with projected cost of $8.3 million.
- Interest-rate swaps hedge variable-rate exposure. Management estimated $1.830 million would be reclassified from accumulated other comprehensive income as increased interest expense over the next 12 months. A 10% move in the reported variable borrowing rate (about 14 basis points) was estimated to change annual interest expense and cash flow by approximately $152,000.
- Management reported compliance with debt covenants. Key risks include tenant defaults, vacancies and lease renewal/re-leasing conditions, local and general economic weakness, financing availability, higher interest rates and development cost or timing overruns. The filing reports no material changes to risk factors in the 2012 Form 10-K and no real-estate impairment charge.
- Free-rent concessions on leases signed in the first nine months totaled $3.349 million over the lease terms, compared with $1.824 million in the prior-year period. This is a leasing incentive to monitor; it is not presented as a current-period cash expense.
Important facts for investors to verify
- Whether the $75 million term loan closed as expected and the final borrowing terms, and how the new debt and swaps affect interest expense.
- Leasing and occupancy progress, including the performance and lease-up of the development pipeline and remaining funding needs.
- Whether same-property PNOI and lease-rate growth persist, particularly given free-rent concessions and market-sensitive leasing demand.
- Debt maturities, bank-facility availability, covenant headroom and refinancing access; quarter-end cash was only $0.207 million.
- Comparability of earnings: prior-year property-sale gains boosted 2012 results, while 2013 growth included acquisitions and development contributions.